Valeant tried to tip the SEC off to a short seller, and it totally backfired

Homini :) on FlickrValeant Pharmaceuticals may have inadvertently triggered an SEC investigation into itself by asking the regulator to look into a short seller who was publicly attacking the company, Reuters is reporting.

That short seller was Andrew Left of Citron Research. His report on Valeant's secret relationship with a pharmacy called Philidor sent Valeant's stock careening down in October.

In the aftermath of Left's report, and after subsequent reporting about Philidor's business practices, Valeant wound up terminating its relationship with the company. Valeant recently said it misstated a small amount of revenue as a result of the relationship.

But amid the furor, the company also sought the help of regulators. In October, it said it asked the SEC to investigate Left over the "completely untrue" allegation that it was using Philidor to fraudulently inflate its revenue.

Instead, the SEC is looking into Valeant and, according to The Wall Street Journal, its relationship with Philidor.

The investigation was disclosed Monday after a rash of bad news from the company. Last week Valeant announced that it would delay its annual report. Then it said it would have to delay its fourth-quarter earnings report so that CEO Mike Pearson, who had just returned from medical leave, could catch up.

The stock fell about 18% on the news of the investigation. It is down 67% since this time last year.

Valeant is no stranger to investigations. The SEC is also looking into Valeant's purchase of Salix Pharmaceuticals last year. The federal government is looking into the company's pricing practices — its business model relied on acquiring drugs through mergers-and-acquisitions deals and then raising their prices.

That is in addition to investigations from the US attorney's offices for Massachusetts and the Southern District of New York.

Valeant, for its part, has said it will change its model. It made a new distribution deal with Walgreens and promised to turn a profit based on volume of sales, not price.

Wall Street, for its part, is raising an eyebrow at Valeant's delays — it wants to see proof, in numbers, that the deal will work. It also wants to see that these regulatory headaches will go away.

From an RBC note out on Tuesday:

Details of the probe were not provided, but we believe that if VRX counsel did not see it as necessary to disclose the subpoena at the time received, then it was likely viewed as a 'minor' issue. Even so, this is yet another element that investors will want clarity on before the valuation multiple is expanded. As such, management and Board credibility may, unfortunately, be further eroded in the short term. In addition, it will likely lead investors to question what remains undisclosed today that may be released with the 10-K.